Hurricane Matthew to test wind, flood insurance in Florida and beyond

Fednat Holding Co

07/10/2016 19:18

By David Morgan 
    WASHINGTON, Oct 7 (Reuters) - Hurricane Matthew, churning 
off the Florida coast, could present two major tests for the 
U.S. insurance industry - one for an unusual wind coverage 
market formed in recent years in Florida, and another for the 
troubled U.S. flood insurance program. 
    In an era of rising seas, catastrophic damage from Matthew 
would likely revive questions about the extent to which American 
taxpayers should subsidize insurance for coastal communities, an 
issue that Washington has not adequately tackled, insurance 
industry experts said on Friday. 
    The first hurricane to threaten a direct hit on Florida 
since Hurricane Wilma in 2005, Matthew also raises questions 
about small, specialist insurers that have come to dominate the 
Florida homeowner market in the past decade. 
    "These smaller companies have a relatively short history and 
haven't had the experience of dealing with claims activity from 
a large storm," said Christopher Grimes, a director at Fitch 
Ratings. 
    Private U.S. insurers write policies covering wind damage 
from hurricanes, but generally will not cover water damage on 
their own. For that, they rely for support on the government's 
National Flood Insurance Program. 
    Potential flooding from Matthew could pile billions of 
dollars in new claims onto the program, which was more than $23 
billion in debt before heavy floods in Louisiana this year. 
Another hit from Matthew, experts said, could force Congress to 
expand the program's borrowing authority yet again. 
    "They've paid billions more than they have already, and will 
probably pay another couple of billion here," said J. Robert 
Hunter, a former U.S. flood insurance program director. "But it 
really has the full faith and credit of the United States behind 
it. If they have to pay more claims, they'll pay them." 
    Under the program, dozens of private insurers sell and 
service flood policies on the government's behalf. The companies 
process claims, collect premiums and send the money to the 
Federal Emergency Management Agency (FEMA), which oversees the 
program. 
    In recent years, FEMA has had to borrow heavily from the 
U.S. Treasury to cover flood losses. Efforts to fix the program 
led in 2012 to reform legislation, but it raised premiums for 
many coastal homeowners. Two years later, Congress curtailed the 
reforms. Lawmakers have not substantively addressed the issue 
since then. 
    Estimates of damages from Matthew ranged from $25 billion to 
$30 billion.  urn:newsml:reuters.com:*:nL5N1CD2DE That would surpass U.S. natural 
disaster insurance losses for all of 2015, which insurer Munich 
Re  MUVGn.DE  estimated at more than $16 billion. 
    Weather forecasters still warned of destructive storm surge 
and waves on the coastline to North Carolina in coming days. But 
fears of extremely high losses from Matthew had abated by 
mid-Friday as the massive storm weakened overnight to a Category 
3 hurricane and remained off the coast, for now. 
    That could spare a new breed of insurers in Florida from 
heavy financial damages. On the companies - Clearwater, 
Florida-based Heritage Insurance Holdings  HRTG.N  - predicted 
that insurers could absorb losses based on Matthew's projected 
path. 
    Shares in Heritage were up 7.2 percent at $13.36 on the New 
York Stock Exchange. Share prices were also up in Florida 
insurers Universal Holdings  UVE.N , HCI Group Inc  HCI.N , 
Federated National  FNHC.O  and United Insurance Co  UIHC.O . 
     
    FLORIDA'S MOVE TOWARD PRIVATIZATION 
    Fitch Ratings, the credit and risk analysis group, said on 
Friday that smaller insurers now constitute 60 percent of the 
homeowner market in Florida. In the absence of a big storm over 
several years, they have been profitable, but they are also 
relatively small and rely heavily on reinsurance. 
    "We'll see if any of them fail as a result of this. But I 
have a feeling they won't," said Hunter, who is now director of 
insurance for the Consumer Federation of America, an activist 
group. "If they have good reinsurance, then being small and 
undercapitalized isn't going to put them under."  
    The federation predicted Matthew could generate up to 
100,000 claims and more than $7.5 billion in damage, mostly from 
high winds rather than floods.  
    After Hurricane Andrew devastated South Florida in 1992 and 
left 65 people dead, Florida set up Citizens Property Insurance 
Corp in 2002 as a government-backed, non-profit insurer of last 
resort for Florida homeowners. It was meant to extend 
wind-damage and general property coverage to Floridians who 
could not get it elsewhere. It does not cover flood damage. 
    In 2004-2005, Florida was hit by several big storms and many 
large private insurers abandoned the state. Citizens became the 
state's largest property insurer. But top, multiline insurers 
returned to Florida after 2010. 
    Concerned about taxpayers' exposure through Citizens, the 
state moved to shrink it by pushing policy-holders onto the 
private market. Encouraged by the state, more than a dozen 
companies, including Heritage and Safepoint Insurance Co., 
formed to write policies for those leaving Citizens. 
    As a result of the emergence of these so-called "takeout" 
carriers - as in taking policies away from Citizens - the 
government-backed insurer now has a much smaller slice of the 
Florida market. 
    The new, smaller companies do not strictly follow the 
traditional insurance model of building up cash reserves to 
cover catastrophic events, but instead rely heavily on  
reinsurance coverage. These companies "are relatively untested 
by a large catastrophe event," FitchRatings said. 
    "Loss experience from Matthew will provide insight into the 
underwriting expertise of the Florida specialist companies and 
their ability to service a significant amount of claims," Fitch 
Ratings said in a statement. 
 
 (Additional reporting by Richard Cowan; Editing by Kevin 
Drawbaugh and Brian Thevenot) 
 ((david.morgan@thomsonreuters.com; +1)(202)(898 8391; 
twitter.com/dmorganreuters; Reuters Messaging: 
david.morgan.thomsonreuters.com@reuters.net)) 
 
Keywords: STORM MATTHEW/INSURANCE